Professor Adams' Lecture Materials

LO6-07: Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.

In this learning objective...

...we will focus on special issues for step 5 (recognize revenue when (or as) each performance obligation is satisfied)

Licenses

A license allows the customer to access the seller's intellectual property (e.g., software, movies, music). When is performance obligation satisfied?

Functional intellectual property: a transfer of right of use to intellectual property that has significant stand-alone functionality. Example: buy a song from iTunes. Can play it as much as you want once purchase is complete. Recognize revenue at the point in time when license first given to customer. [01]
Symbolic intellectual property: provide customer with right of access.
- Example: NBA gives Nike the right to make merchandise for a period of five years. Recognize revenue over the period of time for which access is provided.

Franchises

Owner of business grants someone else the right to sell the owner's products and use the business' name. Example: Subway sandwich shops. Lots of different pieces being sold by the owner to the franchisee in this arrangement. Each performance obligation needs to evaluated separately.

Bill-and-hold arrangements

Customer buys products but asks the seller to hold the products until a later date. Recognize revenue when products finally delivered to customer.

Consignment arrangements

Company A physically gives it product to Company B. Company B sells Company A's product on Company A's behalf. Company A retains ownership of product until sale is made. Recognize revenue when product sold to end customer.

Gift cards

The sale of a gift card recorded as deferred revenue. Revenue is recognized when a customer uses a gift card.

Footnotes

[04] In some cases revenue from functional intellectual property is recognized over time. Example: virus software that is constantly updated and requires the user to use most up-to-date version. Even though the virus protection has significant stand alone functionality up front, there is an expectation that its functionality will change frequently.

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